Short-term vs. long-term loans

Editor's note: This is Part 2 of a two-part series. Read Part 1 here. Last week I noted the large price differences between fixed-rate mortgages (FRMs) and adjustable-rate mortgages (ARMs), and between ARMs with different initial-rate periods. These differences largely reflect market expectations that future rates will be higher. When lenders expect higher future rates, they encourage ARMs by pricing the initial ARM rate low. Selecting among different FRMs: The price differences between FRMs of different term are also unusually large. On Jan. 8, the rates for prime borrowers on 40-,30-, 25-, 20-, 15- and 10-year terms were, respectively, about 5.625 percent, 5.125 percent, 5.125 percent, 4.625 percent, 4.5 percent and 4.25 percent.These differences largely reflect the increased i...